Pakistan’s power sector presents a paradox that is as financially staggering as it is socially devastating. Despite boasting an expanded generation capacity of over 45,000 MW by mid-2025, the sector remains fiscally insolvent. The “vicious circle” of arrears and bailouts, known as circular debt, has ballooned to a staggering PKR 2.6 trillion in FY2025. While policy discussions often focus on technical inefficiencies and fiscal deficits, the human cost is frequently overlooked: the electricity tariff in Pakistan has been transformed into a regressive quasi-fiscal instrument where the poorest households are forced to cross-subsidise systemic mismanagement.
The burden of this debt is profoundly unequal. Research indicates that approximately 30–35% of current electricity tariffs consist of non-energy financial adjustments—charges for inefficiency and debt repayment rather than actual energy consumption. For the bottom quintile of households, nearly 37% of their bill is composed of circular-debt-related surcharges. In a striking display of economic injustice, the poorest 40% of households pay roughly 55–60% of the total Debt Servicing Surcharge (DSS), despite earning less than 30% of the total national income. Conversely, the top quintile, which enjoys nearly 45% of total income, pays only 15 to 20 per cent of this surcharge.
This distortion is exacerbated by the “solar boom” among Pakistan’s wealthy. As electricity becomes increasingly unaffordable, higher-income consumers are leaving the national grid in favour of solar net-metering. While this promotes renewable energy, it leaves the fixed costs of the power system—including massive capacity payments—to be spread across a shrinking base of poorer consumers who cannot afford the upfront cost of solar panels. Every rupee of sector liability is converted into a per-unit charge, effectively shifting the risk of sovereign policy failures onto the backs of those least able to absorb it.
At the heart of this insolvency are the Independent Power Producers (IPPs) and the controversial “take-or-pay” contracts. Capacity payments to these producers reached a staggering PKR 2.1 trillion in 2024. Under these agreements, the government is often legally obligated to pay for a minimum quantity of power even if it is not taken or consumed. Critics have labelled these contracts as disastrous, alleging that some IPPs inflated asset values by 50% to 100% to secure higher returns and misdeclared production capacities to receive payments for electricity that was never generated. While the government has begun renegotiating these contracts to save billions, the damage to investor confidence and the national exchequer is already deep-seated.
Furthermore, the sector continues to bleed through Transmission and Distribution (T&D) losses, which average 16-17%, and abysmal collection rates in certain regions. In DISCOs like PESCO and QESCO, collection rates drop as low as 60%, contributing to a cycle where those who pay their bills are penalised for the “theft” and “inefficiency” of others.
To break this cycle, the focus must shift from periodic price hikes to structural redemption. First, the government must move circular-debt servicing to fiscal accounts, treating it as a sovereign liability rather than a consumer unit charge. Second, surcharges like the DSS and Tariff Rationalisation Surcharge (TRS) should be targeted exclusively at high-consumption slabs (above 200 kWh) to preserve relief for the bottom 40% of the population. Third, there must be a mandate for performance-linked subsidies for DISCOs, tied strictly to loss-reduction targets.
Pakistan’s circular debt is no longer just a technical-financial problem; it is a distributional crisis. Without shifting the burden of fiscal responsibility from end-users to policy efficiency and transparency, the power sector will remain an engine of economic injustice, locking millions into a cycle of energy poverty. The time for temporary price-based “fixes” has passed; only deep-rooted governance reform can prevent the total collapse of the social contract between the state and its energy consumers.